A Comparison of Payroll Software, Payroll Services, & Online Payroll

Small business owners have three options if they are looking to simplify and enhance their payroll process: acquire payroll software, outsource payroll via professional payroll services, or sign up for online payroll. Choosing the right payroll processing system for your small business can be confusing- especially since they all seem to be offering similar services. The truth is, however, that each one is targeting a different market. Some software solutions are industry specific and offer more than just payroll. Pioneer Interactive for example offers payroll functions as an additional feature to their HVAC dispatching software suite. These types of “vertical” software solutions have become the new trend for small businesses. Although many are available it is important that you determine that payroll function within these software packages meet your companies requirements.

The following is a brief description of each type of payroll service:

Payroll Software

Payroll software can either stand alone or come as part of an accounting software package. Use of payroll software, means that all aspects of the payroll process, including generating checks or sending a direct deposit, withholding taxes, filing tax returns, and making payroll tax payments, are done on-premises by the small business itself. While the software is designed to ease the burden of intricate and cumbersome calculations, the business is responsible for upgrading the software and acquiring any tax table and tax rate changes.

The Benefits:

  • You have complete control over your payroll process.
  • You can generate reports to aid payroll management and planning.
  • It automatically calculates employee earnings and deductions and deducts federal, state, and local payroll taxes.
  • You can prepare and print related tax forms.
  • It is moderately expensive.

The Drawbacks:

  • You need someone who is familiar with accounting to process payroll information.
  • There is less customer support and more reliance on your own inner resources.
  • Not all software packages allow for direct deposit.

Payroll Services

When using a payroll service, your company outsources its payroll duties entirely. The payroll service will generate and deliver checks or make direct deposits. It is also responsible for withholding taxes, making tax payments, filing tax returns, and calculating, distributing, and filing year-end tax forms. Human resource (HR) services are also sometimes available.

Your contact with the payroll service revolves around telling the service how many hours each employee worked, informing the service of new or terminated employees, or asking questions.

The Benefits:

  • Good customer support.
  • Easy set-up.
  • The payroll service provider eliminates all payroll tax management burdens.
  • The payroll service will calculate, file and pay federal, state and local payroll taxes.

The Drawbacks:

  • This service is very expensive.
  • The business has no control and little involvement in the payroll process.

Online Payroll

Online payroll is a form of payroll services that is provided by an online company. Also known as Internet payroll, it is a mixture of the two previous options. Generally, the kind of services offered will vary depending on the needs of the small business. Those businesses seeking some control over the payroll process can request fewer services or more access to and control over payroll information. Whereas, those who would like to hand over their payroll can get a “full-service” package. Even something between these two options is generally possible.


  • A lot of flexibility.
  • Generally good customer service.
  • The cheapest option.

The Drawbacks:

  • Since all information is stored and transmitted online, there is the risk that information can be lost or hacked into.
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